AAL

SEC Filing Summary: AMR Corporation (10-Q)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009, for AMR Corporation (parent of American Airlines). The company is operating in a severe global economic downturn, resulting in significantly weakened demand for air travel. Management has implemented capacity reductions, including a planned 7.5% reduction in mainline seating capacity for the full year 2009 compared to 2008, to balance supply and demand.

Key Financial Metrics

Note: Operating expenses for the six months ended June 30, 2009, were $10.1 billion. Fuel expense was $2.6 billion, a significant decrease from the prior year due to lower fuel prices.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 20.9% ($1.3 billion) for the quarter and 18.1% ($2.1 billion) for the six months compared to 2008. This was driven by a 22.3% drop in mainline passenger revenue due to lower traffic and yields.
• Expense Reduction: Total operating expenses decreased 31.5% for the quarter and 24.0% for the six months. This improvement is largely attributable to a $1.1 billion impairment charge recorded in 2008 (not present in 2009) and a 40.6% decrease in fuel price per gallon.
• Loss Improvement: The net loss for the quarter improved significantly from $1.46 billion in Q2 2008 to $390 million in Q2 2009, primarily due to the absence of the prior year's fleet impairment charges.
• Liquidity: Unrestricted cash and short-term investments decreased from $3.1 billion at year-end 2008 to $2.8 billion at June 30, 2009, due to reduced demand and debt principal payments.

Guidance, Outlook, and Risks

Outlook: Management expects mainline capacity to decline approximately 8.5% in Q3 2009 versus Q3 2008. Unit costs excluding fuel are expected to be higher than prior year periods due to increased pension expenses and cost pressures from capacity reductions. The company anticipates continued downward pressure on passenger yields.

Liquidity and Financing: The company remains heavily indebted. While it believes it can access sufficient liquidity for the remainder of 2009, there is no assurance. Recent financing activities include $470 million in aircraft loans and a $520 million Pass Through Trust Certificate issuance in July 2009. The company estimates at least $3.7 billion in unencumbered assets.

Risks and Contingencies:

• Covenant Compliance: The company must maintain a liquidity covenant of $1.25 billion and an EBITDAR covenant. While compliant as of June 30, 2009, future compliance is uncertain due to market volatility.
• Legal Proceedings: The company faces investigations and potential fines from the European Commission and other jurisdictions regarding alleged cargo surcharge conspiracies. It also faces various antitrust lawsuits regarding passenger surcharges.
• Fuel Hedging: The company recorded net losses of $197 million (Q2) and $465 million (YTD) on fuel hedging contracts. Future reclassifications of losses from accumulated other comprehensive income into fuel expense are expected.
• H1N1 Impact: The H1N1 influenza outbreak in Q2 2009 had an estimated adverse revenue impact of $50 million to $80 million.

Investor Verification Checklist

• Verify the sufficiency of the $2.8 billion unrestricted cash balance against upcoming debt maturities and capital expenditure requirements for the remainder of 2009.
• Monitor the company's ability to comply with the Liquidity and EBITDAR covenants under its $433 million Credit Facility.
• Assess the potential financial impact of the European Commission's Statement of Objection regarding cargo surcharges and other pending antitrust litigation.
• Review the status of the $520 million Pass Through Trust Certificate financing and the escrowed funds for future aircraft deliveries.
• Track the reclassification of fuel hedge losses from Accumulated Other Comprehensive Loss into fuel expense for the remainder of 2009.